New highs are coming for business

By John Lin 林雋

Being a leader in Taiwan, or even in the Greater China region, as many Taiwanese businesses already are in their respective industries, is no longer enough in a world that is flat and where competition is international.

Globalization and global competition are driving Taiwanese businesses into seeking continued growth, domestic as well as overseas. Mergers and acquisitions (M&A) provide an obvious means and can often be a shortcut for businesses to achieve their goals for growth.

At a time when many Taiwanese companies (save for the very few who have truly gone global) need to look to expand internationally, the backing of international private equity funds in bringing international knowledge, networks and the required financing makes good sense.

As such, there should have been plenty of partnering opportunities. However, this has not been the case for the past several years. While industry-to-industry M&A activity has steadily climbed after the 2008 financial crisis, private equity activity involving international funds has stagnated or even frozen up after the Yageo setback in 2011.

In April 2011, Yageo Corp founder and chairman Pierre Chen (陳泰銘) teamed up with Kohlberg Kravis Roberts (KKR), the US-based international private equity firm, and launched a public cash tender offer to acquire up to 100 percent of the outstanding shares of Yageo, at a price of NT$16.10 (up to US$1.6 billion).

The plan was to delist and make Yageo private after the completion of the tender offer — a typical private equity-backed management buyout (MBO) approach.

Although MBOs may be common elsewhere, such buyouts occurs much less frequently in Taiwan. An MBO can provide a business that has decent potential a much-needed break from the public market to refocus its strategies to achieve longer-term strategic goals. Taking the company private for some time, away from the pressure to periodically answer to the market and produce short-term financial results, can allow the company more room to make the needed transformation to realize its full potential.

A successfully transformed business will often eventually go public again. Private equity firms provide, among other things, the financing required during the private period to support the management to refocus the business.

Dell is currently trying the same and fighting its own set of hurdles. When things turn out well, private equity funds will typically exit, either when the company again goes public or by selling to a new owner.

In the Yageo MBO, because Orion, the entity jointly formed by Pierre Chen and KKR, is not local, Orion’s bid for Yageo was subject to foreign investment approval by the Investment Commission. That review was based on a set of seven principles governing the review of private equity investments in Taiwan: transparency of investment; sound investment structure from a financial perspective; protection of domestic employees; protection of shareholders investing in the target company; domestic tax impact; impact on the financial market; and impact on the continued development of the target enterprise.

The principles have been generally perceived by foreign investors to be lacking clearly identifiable standards or thresholds to meet. Despite the Yageo MBO having met all other requirements and thresholds under the tender offer, and company and securities regulations, the Investment Commission ultimately did not approve the Yageo MBO, citing, among other reasons, insufficient protection of minority shareholders’ interests.